Thursday, 25 August 2016
Last updated 13 hours ago
Jul 28 2009 | 12:13pm ET
A partner at a Chicago-based private equity firm in hot water with the Securities and Exchange Commission over charges of aiding and abetting fraud has agreed to settle with the agency.
Paul Oliver and his partner John Orecchio ran AA Capital Partners from February 2002 to September 2006. The firm managed some $200 million in assets for six labor unions, including five pension funds, and advised several p.e. funds through its affiliated entities.
While building up AA Capital’s advisory business, Orecchio allegedly spent lavishly on travel and entertainment, regularly entertaining clients in Detroit and Las Vegas. In August 2003, the SEC says Orecchio began a relationship with a striper who performed at a Detroit strip club, spending extravagant amounts of money on his mistress and her family.
Between 2003 and 2006, Orecchio allegedly bought real estate in Michigan for his mistress and her mother, including a horse farm. He also bought a boat, several luxury automobiles and approximately $1.4 million of jewelry for his mistress. On two separate occasions, Orecchio also rented a private Caribbean island to throw parties for his mistress and her friends. He also spent a considerable amount of money refurbishing the horse farm and paying for the renovation of a Detroit strip club that he intended to buy for his mistress.
In May 2004, Orecchio told AA CFO Mary Beth Stevens that he owed a significant amount of money to the Internal Revenue Service based on his ownership interest in one of AA Capital’s affiliated p.e. funds and a failure by AA Capital’s auditors to timely file certain tax returns. At Orecchio’s direction, Stevens allegedly withdrew over $600,000 from AA Capital’s client trust accounts, deposited the funds into AA Capital’s operating account and then wired the money to Orecchio’s personal bank account.
Afterwards, the SEC says Orecchio asked for more money from Stevens to cover his tax liability. Between May 2004 and October 2005, Stevens made at least 20 separate disbursements, withdrawn originally from AA Capital’s client trust accounts, to Orecchio totaling over $5.7 million. In several instances, Stevens wired funds from AA Capital directly to bank accounts associated with Orecchio’s horse farm and the Detroit strip club Orecchio was renovating.
Orecchio also allegedly looted investor money in other ways. Between August 2005 and July 2006, Orecchio lied to his partner about the amount of money required for one of AA Capital’s affiliated p.e. funds’ investments in a real estate development, the SEC says. Orecchio made off with $8.7 million for this investment, but invested only $1.3 million in the real estate development. He actually spent $6.9 million on contractors renovating his horse farm and the Detroit strip club and $500,000 for a down payment on a Las Vegas condominium.
Between 2004 and 2006, Orecchio also allegedly requested and received reimbursement for numerous expenses that AA Capital was not entitled to charge back to its clients, including more than $1 million in non-existent political contributions, numerous visits to various casinos and strip clubs, and more than $1.5 million in tickets to sporting events and concerts for Orecchio, his mistress and her friends.
AA Capital’s expenses far exceeded its revenues in 2005 and 2006, allegedly because of Orecchio’s lavish spending, and in order to keep the firm afloat, Stevens periodically withdrew funds from AA Capital’s client trust accounts to pay the firm’s expenses. AA Capital ultimately misappropriated more than $10 million in investors’ money to cover the shortfalls between the firm’s revenues and expenses.
However, the pair’s ongoing looting of their firm’s coffers went unnoticed until early 2006, when Oliver announced his retirement and began negotiating with Orecchio regarding the sale of Oliver’s interest in AA Capital. The SEC’s examination staff discovered Orecchio’s and AA Capital’s misappropriation of client funds during a compliance inspection conducted between in August 2006.
Oliver was found to have willfully aided and abetted and caused AA Capital’s violations, which prohibits an investment advisor from engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon any investor or prospective investor.
He has been suspended from associating with any investment adviser for 12 months, and ordered to pay disgorgement of $49,786, prejudgment interest of $7,979 and a civil penalty of $75,000 to the SEC.